Pensions

VIDEO- Watch the first 2 minutes 23 seconds of this video as a starting point on pensions (NB! Don't watch beyond mentioned time as rules have changed)

Everyone receives a full basic State pension when they reach the State Pension Age. However, it is not normally enough for a person to live comfortably in retirement. The Government encourages people to save into other pensions so that they don't rely as heavily on the state, are more independent and have greater financial security in their old age.

IMPORTANT FACTS- What is a pension?

• A pension is a way of saving for retirement and will be the main source of income for the elderly when their earning capacity is reduced or removed through ill health.
• A pension is often one of the largest assets that an individual will own, more often than not only exceeded by the individual’s home.
• Pensions are different to other savings because they offer tax relief, are tax-efficient and can only be accessed at a certain age, normally not until you're at least 55.
• In a nutshell, a pension is just a tax-free pot of cash that you, your employer (and sometimes the Government) pays into, as a way of saving up for your retirement.
• Tax is paid back by the Government on all pension contributions. You automatically get 20% tax back from the Government as an additional deposit into your pension pot. If you are a higher rate taxpayer you can claim an additional 20%, while top rate taxpayers can claim an additional 25%.
• Tax relief is only paid on contributions up to your annual earnings.
• There is no savings tax and no capital gains tax on pensions.

REAL LIFE EXAMPLE- More than half of people in the UK either aren’t saving at all for their retirement or they aren’t saving nearly enough to give them the standard of living they hope for when they retire. (Source)

IMPORTANT FACTS- Auto-enrolment

VIDEO- Very clear video on auto-enrolment.

IMPORTANT FACTS- What is auto-enrolment?

• Auto-enrolment is a scheme introduced by the Government and is a response to the overwhelming number of people who do not save for their retirement and the rise in how long people are expected to live in retirement. The average 25-year old is likely to live until at least 90 (source)
• Employers must offer you access to a pension scheme, so long as the following apply:

- you earn more than £10,000 a year

- you are aged between 22 and State Pension age

- you work in the UK

• Employers have to enrol all eligible employees into a pension and make minimum contributions into the scheme. If you are eligible, your employer will enrol you automatically into a pension. This is why it is called ‘automatic (auto) enrolment’.
• By 2013 any employer with more than 350 staff will be obliged to set up and contribute into workplace plan for its employees. And between 2014 and 2016, those employers with less than 350 staff will be subject to the same rules. By February 2018, all employers even those with fewer than 30 employees will be in the auto-enrolment

IMPORTANT FACTS- Auto-enrolment FAQ's

• Can you opt out of auto-enrolment?

You will be able to opt out from pension scheme if you want. But even if you sign out they will re-add you onto the system after 3 years and you can re-join at any time. If you do opt out, then you’ll lose out on your employer's contribution to your pension, as well as the government’s contribution in the form of tax relief. In the first 2 years of auto-enrolment, 5% of 22-29 year olds opted-out according to Nest report. This was 20% less than expected and the lowest opt-out of all age groups.

• How do I know if I have been auto-enrolled?

You may not see any changes if you're already in a workplace pension scheme. Your workplace pension scheme will usually carry on as normal. However, if your employer doesn't make a contribution to your pension, then they will have to enrol you in a scheme. If you're working for a small or medium-sized organisation then they may not yet have started auto-enrolment as it is being brought in by stages between 2012- 2018. However, nearer the time employers will tell you the exact date and whether or not you are eligible for the scheme.

• Is auto-enrolment just for those on full-time, permanent contracts?

No, auto-enrolment is for anyone who meets the eligibility criteria. You'll be covered if you’re on a short-term contract, or an agency pays your wages, or you’re away on maternity, adoption or carers’ leave.

• How much will I have to contribute to auto-enrolment?

- There is a minimum total amount that has to be contributed by you, your employer, and the government in the form of tax relief.

- This total minimum contribution is currently set at 5% of your earnings (2.8% from you, 2% from your employer, and 0.2% as tax relief).

- The minimum contribution applies to anything you earn over £116 per week (in the tax year 2018-19).

• Can I pay more to my auto-enrolment pension?

You and your employer can pay in more than the legal minimum. There is no obligation to do so but you and your employer may choose to do this.

• Can I pay less than the minimum contribution?

You can pay less than as long as your employer's contribution means at least the minimum has been paid i.e. the employer makes it up

• My employer has given me a different percentage to the minimum contribution, why has this happened?

Your employer can also require you to pay a higher level of contribution as long as your employer is paying the minimum. They may tell you this as a sum of money or as a percentage. If they give you a percentage, you can find out what it means in pounds and pence using the Workplace pension contribution calculator.

• I'm self-employed, how does auto-enrolment affect me?

Auto-enrolment only applies to those who are employed, not the self-employed so there is no compulsion on you to start a pension, though can you always start your own private scheme.

With auto-enrolment, it forces an employer to contribute, but if you're self-employed you have the right to give yourself whatever you want anyway.